Generally speaking, the process of underwriting (or bringing an issue to market) begins with the decision of what type of offering the issuing company needs. Typically, the company would consult with an investment bank regarding how the offering should be structured and distributed.
Securities offerings can be generally classified into two groups: (i) new issues (i.e., IPO's from companies first going public) and (ii) additional issues (i.e., additional issues from companies that have already gone public). Additionally, public offerings can be further classified as: (i) primary offerings (with proceeds going to the issuing company); (ii) secondary offerings (with proceeds going to a major stockholder, who is selling all or part of his/her shares); (iii) split offerings (i.e., a combination of primary and secondary); or (iv) shelf offerings (i.e., an offering under SEC Rule 415, which allows the issuer to sell additional securities over a two-year period to raise funds as needed).
Once the structure of an issue is decided, the next step in the underwriting process is generally to form the “syndicate” and, if needed, a “selling group.” Because most new issues are too large for one underwriter to handle, a “managing underwriter” (or “bookrunning manager”) often invites other investment bankers to participate in a joint distribution of the offering. This group is known as “the syndicate”; and the managing (or lead) underwriter is known as the “syndicate manager” (or “bookrunning manager”). Each member of the syndicate usually makes a firm commitment to distribute a given percentage of the entire offering, and he/she is held financially responsible for any unsold portion of his/her allocation. “Selling groups” (i.e., groups of chosen brokerages) are often formed to assist the syndicate members in meeting their obligations to distribute the securities. Members of the selling group usually act on a “best efforts” basis, and are not financially responsible for unsold shares.
Generally speaking, it is the job of the syndicate manager to “prove the market” for the issue; typically, the manager (sometimes with the assistance of co-manager(s), etc.) coordinates a series of meetings and presentations (a “roadshow”) to explain to potential investors that the proposed issue represents a good investment at its proposed price (or, in the case of an IPO, price range). Under the most common type of underwriting, the syndicate manager makes a commitment to the issuing corporation to purchase all shares being offered. If part of the new issue goes unsold, any losses are distributed among the members of the syndicate.
Testing the market's receptiveness to a new issue is done by gathering “indications of interest.” An indication of interest (“IOI”) does not legally obligate the party expressing interest to actually purchase the issue when it becomes available, since such sales are prohibited until the security has cleared registration with the Securities and Exchange Commission.
When new shares are issued, there is a “spread” between what the underwriters buy the stock from the issuing corporation for and the price at which the shares are offered to the public (the “Public Offering Price” or “POP”). The spread is traditionally allocated as follows:                a Manager's Fee (typically, 10-20% of the spread) goes to the managing underwriter for negotiating and managing the offering;        an Underwriting Fee (typically, 20-30% of the spread) goes to the managing underwriter and syndicate members for assuming the risk of buying the securities from the issuing corporation; and,        a Selling Concession (typically, 50-60% of the spread) goes to the managing underwriter, the syndicate members, and to selling group members for placing the securities with investors.        
Traditionally, new issues were targeted largely—if not exclusively—to institutional investors, e.g., mutual funds, pension funds, investment managers, hedge funds, etc. However, recent trends, such as the widespread media coverage that many new issues receive, have created significant—and presently unmet—demand for access to the new issue marketplace among individual investors who buy and sell their own shares (“retail investors”). A typical retail investor may buy 100-1000 shares of an offering.
Bringing a new deal to market is a complicated, time-consuming process that demands significant communication and cooperation between numerous members of a multi-disciplinary team. As shown in FIG. 1, the process typically begins with an investment banker (“IBK”) 10, who meets with the client (and potential issuer) to determine how to best raise capital to meet the client's needs. The banker's responsibility includes managing the relationship with his/her client before, during and after a transaction. The banker typically is—and remains—the client's direct contact during the entire process.
An Equity Capital Markets (“ECM”) group is typically responsible for pitching, marketing and pricing a transaction. Requiring heavy interaction with other in-house disciplines/departments (e.g., banking, sales, research) as well as the greater investment community (e.g., “the street”), ECM can be considered as the nucleus of a transaction or deal. Unlike the sales and banking functions, the capital markets group has the tough role of satisfying two clients—the issuer and the investor(s)—with fundamentally opposite interests. (I.e., an issuer wants to sell at the highest price possible, while an investor wants to buy at the lowest price possible). ECM's job is to figure out the right price, while managing expectations of both opposing parties.
An institutional sales department (“ICD”) is responsible for knowing which of its institutional investors will have interest in a particular new issue and providing the potentially-interested investors with all the details and marketing the offering. Once an investor has been informed, the institutional salesperson relays the investor's feedback to ECM.
Beyond this group of in-house disciplines/departments is the syndicate, which, as previously noted, includes a group of broker/dealers, each of which have agreed to underwrite a certain percentage of the offering. Each member's percentage is determined by the member's “underwriting bracket.” Typically, the brackets are allocated as follows:                Manage—also referred to as Lead Manager, this is the highest bracket, with the largest percentage in the group;        Co-Manage—also referred to as Co-Lead Manager or Joint Lead Manager, this is the only role that can be shared in the same bracketing as the Lead-Manager, or can have a separate bracket of its own;        Major—also referred to as underwriters; and,        Sub-Major—also referred to as underwriters.        
Returning to FIG. 1 in the next step 20 of the process, the investment bankers consider market conditions, consult with other in-house departments (such as institutional sales, ECM, etc.), and devise a recommended issuance strategy for the client. After securing approval 30 from the client, the deal is passed to the ECM group for marketing/realization. The syndicate marketers then “circle” 40, pitching the deal to potential investors and soliciting indications of interest. Once the deal closes, the net proceeds 50 are distributed to the client and the underwriting, management and selling concession fees 60 are retained by members of the syndicate and the selling group. The overall process can take anywhere from months to years to complete.